The new IT structure will not have an impact on most taxpayers: analysis
In the Union Budget, Finance Minister Nirmala Sitharaman, with great success, announced a new personal income tax structure. This was promoted as another “significant reform” that would simplify the income tax regime.
Currently, there are three slabs of income tax rate, there will be six in the new structure. There are exemptions for savings and home loans, there will be none in the new structure, instead of reduced income tax rates. There is an income tax framework now. In the future, there will be an option between the old and the new structure. Sitharaman said that this “new and simplified” personal income tax regime will bring “substantial benefits” to a “large number of middle class Indians.”
As expected, the media held on to this as the most important announcement in the budget. After days of incessant comments and analysis, questions arose: is this new income tax structure really beneficial for the working class? Is it possible to change from one structure to another every year? Is it necessary to give up all exemptions to take advantage? The lower tax rate will affect this to home ownership, etc.
Subsequently, the secretary of income of the Ministry of Finance, in an interview, tried to clarify. He said that “the Ministry of Finance has analyzed the income tax data of 58 million people and that 70% of taxpayers will benefit from this new income tax structure.” Ms. Sitharaman has also publicly promoted that a “large number of taxpayers” will benefit from this new fiscal structure. While the finance minister and her officials have greater access to better information and data than most others, the claim that 70% of people will benefit from the new income tax structure seems suspicious and misleading .
According to income tax data made available to the public for the 2018-19 evaluation year, there were 55 million people who filed an income tax return. The income tax department has made aggregate data on gross income, different types of income, “returned income” and real income taxes paid by these 55 million taxpayers in 2018-19. The income returned refers to the income that will be used for the calculation of taxes after making use of the tax exemptions. This data can be analyzed to estimate how many taxpayers have obtained benefits from tax exemptions and in what amount. With this, it is possible to infer how many people will be affected by the new income tax structure.
People who earn less than five lakh rupees per year will be exempt from income tax in both the old and the new regime. Forty-one (75%) of the 55 million reported a returned income of less than five lakh rupees. In other words, 75% of income taxpayers in 2018-19 were not required to pay any income tax, either with or without tax exemption benefits. This implies that 75% of taxpayers will not worry about the “new and simplified” tax structure. So it is not clear how the finance minister and the secretary of income made the surprising statement that more than 70% will benefit from the new structure when the data shows that 75% of them will not even be affected by the new tax regime. .
Then, for people who earn more than Rs 15 lakh per year, there is no change in the tax rates between the old and the new structure. Which means that people in this category of income will be ambivalent between the two structures since their tax rates do not change. According to the 2018-19 data, approximately 5% of all taxpayers reported gross income of more than 15 rupees a year and, therefore, the new tax structure will not bother them.
Then, in total, 80% (75% + 5%) of income taxpayers of 2018-19 will not benefit from the new structure and will remain agnostic between the old and the new.
Of the remaining 20% of all income taxpayers who could be affected by the new structure, almost three quarters of them paid an average amount of Rs 23,000 in income taxes, after the exemptions. For a person who pays only Rs.23,000 annually in income tax, the new structure with a reduction of five or ten percentage points in the tax rates instead of the previous exemptions will not generate any significant savings.
Therefore, 80% of taxpayers will not be affected by the new structure and another 15% will not see any significant savings benefit. That makes it 95% of all income taxpayers of 2018-19. Which means that, according to this analysis, the new income tax structure will have a significant impact for only three million (5%) of the total fifty-five million taxpayers of 2018-19.
It is disconcerting that the finance minister and her income secretary said that more than 70% of taxpayers will benefit from the new structure. Unless they are delivered to the pun between the “taxpayers” of the income tax and the “payers” of the income tax. That is, they may be referring only to the small fraction of people who pay a substantial income tax, and said 70% of this small fraction will benefit from the new structure. What is obviously a misleading, mischievous and hollow statement to capture the headlines, a common practice of the current government.
Praveen Chakravarty is a political economist and a senior congressman.
The opinions expressed are personal.